In a newly released Virtual Markets Integrity Report, the Office of the New York State Attorney General ("NYAG") concluded that many virtual asset trading platforms lack the necessary policies, procedures and controls to protect customers against "theft, fraud and abuse" and ensure "fairness, integrity, and security." The Report follows a probe of the cryptocurrency industry launched earlier this year which sought information from thirteen cryptocurrency exchanges.
In the Report, the NYAG focused on three primary areas of concern as to the exchanges' operations: (i) the failure to take steps to curtail manipulative trading; (ii) overlapping lines of business, resulting in a lack of independence and potential conflicts of interest; and (iii) the general lack of a transparent approach to auditing the virtual currency reportedly in their possession.
The NYAG provided a number of recommendations to consumers considering doing business with cryptocurrency exchanges. Specifically, consumers should take into account (i) the jurisdiction where an exchange is located (particularly whether it is based in the United States or overseas), (ii) whether the exchange requires know-your-customer information from new customers, (iii) whether the exchange accepts fiat currency, and (iv) whether the exchange fully discloses all relevant trading and service fees.
According to the Report, seven of the ten participating exchanges sought approval from the New York State Department of Financial Services ("NYDFS") to operate a virtual currency business in New York. Of the four cryptocurrency exchanges that declined to respond - each claiming they did not allow trading by customers in New York - three were referred to the NYDFS for the potential violation of state virtual currency regulations.
Commentary / Joseph V. Moreno
Attorney General Underwood, like her predecessor, is clearly taking a highly skeptical view of the cryptocurrency industry. As stated in the Report, since cryptocurrency is not tied to a tangible asset or to the performance of a particular company, "some observers [] question whether virtual currency has any underlying value at all." The Report quickly goes on to say that it is not weighing in on this point, only on consumer protection concerns as to the exchanges; however, it is not difficult to read between the lines.
Coupled with its notoriously burdensome Bitlicense Regulatory Framework, New York State will remain one of the less favorable jurisdictions for cryptocurrency. The key will be when, or if, regulators find that sweet spot somewhere between reasonable consumer protection and overly-burdensome rules that could very well regulate the industry out of business. That said, the new Report provides useful tips both to end users and those looking to develop or enhance an exchange's processes and controls.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
